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Coffee Talk - Recapping the Week in Real Estate 03212020

March 28, 2020



Welcome to our first Agent Ignite Coffee Talk. I've got my water. As I was telling Jeremy Keen earlier, he's like, "Where's your coffee?" I'm two coffees in already, so I'm already a little shaky and I talk fast anyway, so I'm not sure you guys could keep up if I had a third. That's the New Yorker coming out in me. Our first weekly Agent Ignite Coffee Talk, we're going to do this until we don't. We're going to do this until things settle down again.

Right now, things are happening at light speed. It is just changing daily, and so the moment we don't need this anymore, we'll pull back to our monthly, but for right now, we do. The only Fridays that it won't happen on is the Friday that we have the third Thursday monthly agent night. We're going to hold true to that format. I've got Bruce Gardner coming in April. Hopefully, we'll all be back together again in May, but we've got an incredible speaker lineup for our monthly events.

We're going to keep doing those, so let's jump in. I want to share what happened this week, but I want to put it in the perspective of where we came from. 

Listen to the Q&S Session from this week's coffee talk here >


Coffee Talk:

Agent Ignite:

How fast can you listen or read? Nicole had a bunch of coffee for this so we know she's speaking fast, but if you missed something, you can replay or read through the transcript here:

We're going to keep doing those, so let's jump in. I want to share what happened this week, but I want to put it in the perspective of where we came from. Everybody's trying to liken this recession to 2008, or even to 9/11, and I get it. We want to compare it to something, because with that comparison comes a sense of familiarity, something that I can wrap my head around, but it's not necessarily comparable.

For that, I want to be very specific that this is different. This, as you guys probably already know, is a pandemic. It is all centered around the Coronavirus. The faster we move towards a treatment plan, the faster we pull out of this. The housing market was the strongest it had ever been. In fact, home sales were at a 13-year high, housing starts were at a 13-year high, we had tight inventory, which we'd love to see more supply.

That tight inventory was giving us appreciation. We had strong demand and we're going to continue to have strong demand. You guys saw, if you were last week's Agent Ignite, where I showed you the average age of a home buyer is 33, and for the next five years we have this massive population gain, so thankful for those babies being born 33 years ago, we have this continued demand and life will go on.

Kids will graduate, people will have to move, people will have babies, and that's just going to happen and it's going to continue to happen. We have this continued demand and we also have low-interest rates, and we're going to talk about interest rates a little bit, but they have been extremely volatile, but they're still low. On any given day, I'm walking anything between three and a quarter and four and a quarter, and I know that sounds high, today's market, four and a quarter.

That swing historically is still at amazingly low-interest rates, and we all know that once we get into a recession, that those rates are going to continue to stay low. We've got a while of low-interest rates on our side, which is going to help affordability. Affordability is fantastic, of course, for those people that haven't lost their jobs, and my heart does go out to them. I'm not removing the fact that this whole thing has a huge health side to it.

I'm trying to stay focused on the economic side so that I can provide you guys the stability so that you can continue to educate your clients, I can continue to educate you, but yes, personally, we're all dealing with this, and that I don't take lightly. We also have highly qualified buyers. We had highly qualified buyers coming in, non-QM, which is the non-qualified mortgage, had only started ramping up. As you know, it's almost all been gone and it will be years before it comes back.

It's just too risky of a product. There's no buyer for the paper. It all comes down to is there an investor to buy the paper that I've got? Then we have a high amount of equity in this country. In fact, we have $15.8 trillion in home equity, meaning all the values of residential real estate in the United States, less all of the loans, we have $15.8 trillion in 2019. That's phenomenal, and as we know, 40% of all homes didn't even have a loan on them.

All right, so let's talk really quickly about this week and what we're seeing. Let me get out of here, sorry. All right, so quantitative easing, I feel like was likelier. To infinity and beyond, that's pretty much what was said, and this all started on Monday. I could go back and talk about everything else that the fed had already started doing, the money that they had already started putting in in the initial drop of the fed rate.

Let's just look at this week, because this week alone is mind-blowing every single day and the changes that we had. He said, "I am not stopping. I will send as much money as we need, we'll print it." The inflation we'll deal with later, we're taking care of the funding right now. Quantitative easing with no limitations. He was buying everything. Commercial bonds, residential bonds, mortgage-backed securities, as we know them, treasuries.

Any kind of government or muni bonds he was willing to buy, so in that case, he was trying to uphold any of the industries that he could. Small business loans were coming into a conversation at that point and the kind of monies, and then he had also instituted something called Main Street, which was given to small and medium-sized businesses. He kicked it right out of the gate on Monday, where he, Powell, had said $75 billion a day to buy treasuries, $50 billion a day to buy mortgage-backed securities.

Now, I want to take a step back just for a second, because all that sounds great, but from the mortgage perspective, all of that funding and all of that buying mortgage-backed securities, it creates a supply and demand where our interest rates are impacted and all of a sudden we're going to have situations where lenders are getting margin calls. We're going to go into that in a minute, but those margin calls are not a good thing.

When rates go down, individual lenders have to write checks, sometimes in the millions. It could be anywhere from $28 to $32 to $80 million checks per week for margin calls. All of that, buying mortgage-backed security sounds great, but it wasn't actually supporting our mortgage space, it was hurting us. Things have been changing with the stimulus package, so we're going to talk about just a couple of days later.

That happened on Monday, and on Tuesday we had a calm day. Home appreciation values came out, and I thought that that was so funny that everything is great and rosy, but remember, all of that is data that has passed, but we were still seeing strong home sales, strong home starts, and we were still seeing strong appreciation.

We will continue to see home appreciation and what's going into home appreciation, I'm getting this call constantly saying, "I've got people that are scared to buy because they think we're going to go through a dip and lose value in our homes." They're liking it to 2008. This is not that. If you look at the inventory statistics on 2008 versus today, part of the reason why 2008 happened, the recession didn't cause the housing bubble, the housing bubble caused the recession because we had too much inventory.

All of a sudden we couldn't sell that, we had all the foreclosures or short sales, and homes were going for bottom prices. Now, we will have some foreclosures in this market, and I will talk about that in a minute, but not nearly to the extent. As long as we have the low-interest rates, as long as we have the strong demand, and as long as we have the lack of supply, which we have right now, and remember, builders aren't really building right now because of lack of workers and supplies and funding, so we're going to continue to have low supply.

Those appreciation numbers will continue. Wednesday happened and we got a stimulus package, right? It got passed by the Senate and it's going to be passed by the House hopefully today, it's scheduled to come out. The COVID stimulus package is even more money, more specifically dedicated, so $1,200 checks written to every individual as long as you make less than $75,000 a year, another $500 per kid, $500 billion towards the airlines, which is beautiful.

It was $500 billion towards all of the industries, $60 billion specifically to bail out the airlines, $350 billion for small businesses to keep employees, $130 billion for hospitals, $250 billion to expand the unemployment insurance and services, $150 billion for state and local governments, so that's a lot of money. In that stimulus package is also the forbearance program. At first, Fannie Mae and Freddie Mac had come out saying that they were allowing a forbearance for up to 60 days.

That happened last week, so it's not on my schedule and charts here, but this week they're putting that into place where it's up to a year. They're looking at increments, so they're doing 180 days and then an additional 180 days. So they're looking at this going, "Okay, six months to start with another six months already pre-approved, depending on where the economy is." That forbearance opportunity is pretty wide open.

Every borrower and you as agents need to know this because you probably have clients asking, they need to contact their servicer. I'm seeing some scams already on the internet trying to get their information. Don't let them just go and do a Google search. Have them contact their servicer and get the process that they need specifically per servicer. Those services are supposed to give them all that information and provide it, and should they be able to say ...

Remember, this is a health thing, so you can't dig too deep, but if they say that their family or themselves are impacted by COVID, then they're going to be able to take advantage of this forbearance. Well, that sounds like a great thing, but again, this forbearance is going to hurt our mortgage industry, and it's specifically the servicers. I want to talk about that, but I want you to keep this point in mind because I want to finish the week.

Then I want to circle back to how this is impacting servicers and then why people are now saying that gov loans are going away and why I'm hearing some realtors aren't taking a government offer when they get it on their listing, or why I'm now hearing that some lenders are saying it's either, one, going away or, two, the restrictions, and it all comes down to do you have enough people to buy the paper?

This forbearance is causing a crisis in the mortgage industry. At first, it wasn't being addressed, but it is now, so the Federal Reserve is now putting together facilities to fund the servicing. They just have to collateralize the paper and they'll get enough money to continue that, so that's going to be a huge win, and we'll find out more after all of this has passed. Mortgage applications, not a huge surprise that they're way down.

In fact, we had had an 11-year high just two weeks ago, and then the dramatic declines that we had were the biggest drop since 2009. I only bring that up to say that those of us that are busy right now, we are going to see some level of a slowdown as this continues. The longer it takes to find a treatment plan is the longer we're going to be in this situation, and we're going to have the lack of apps and we're going to have the business slowdown.

What we had to do is just be proactive and I'm going to share with you some things that I'm doing in my free time to stay relevant, to stay educated, and to make sure that I'm staying on what's happening. Here was the big news for Thursday. As we come around, towards the end of the week, we got the jobless claims. I don't know if you could fully see the extremity of this change, so the highest that we had had in weekly jobless claims in history was 671,000 jobless claims in 1982.

That was the highest. Just last week on March 14, we had 282,000 people file for unemployment. On March 21st, the numbers came out, we had almost 3.3 million people file, and that number should be higher, but literally systems crashed. They couldn't take all of the applications, so next week when this comes out, it's expected to be higher still.

It is really interesting when I look back, and Mnuchin had started this last week, and I'd even talked about it at the Mobley agenting night, when he had said that unemployment was going to hit a high of 20%, the reality of that just didn't even make sense. The great depression was 25%, our great recession wasn't even 20%, so for him to say 20% I thought it was a bit extreme. Well, now I'm hearing it could be as much as 30%, but we have to put this in perspective.

This is a hard, fast, intense change. It's because people can't go to work, they're stuck at home. They have to file for unemployment, they're being laid off. There will be jobs returning as soon as we can go back to work and get released from our homes. We have to know that that's coming. Will it be the same? No, it won't and some businesses won't come back, but the businesses that can come back and can reemploy their people, they will see some level of normalcy relatively quickly.

This economic change right now, or I should say this recession, is not an economic recession. It is because of the Coronavirus, so let's go on. We wanted to show you really quickly, so we track the 2.5% coupon rate. That's a mortgage-backed securities coupon rate, and this chart is a big one. It just simply shows you that rates have been declining. As the coupon rate goes up, that means our interest rates go down.

We've seen that this has been trending up since November of 2018. That's what this chart is, but these are candlesticks, so every single one of these little moves, these little red and green movements is the change in the day. Check this out, so this has been my last two weeks. You guys, I am telling you, I can't predict what rates are going to do any day, nobody can. The size of those candlesticks is the volatility in every single day.

Every day we wake up surprised, and then throughout the day, we continue to be surprised as we have rate changes. We used to be able to watch the 10-year treasury and know where our rates were headed. We used to be able to watch the 2.5% coupon and know where our rates were going, but due to supply, due to the issues that we're having with servicing, due to liquidity, the system is broken. It just is. It doesn't have the connection, the partnership of those metrics to my results like it used to.

What we have to do is simply relate what's happening behind the scenes and how do I communicate that in a way that my clients understand and don't take it out on me if I'm not giving them a 2.99 rate that day? I'd be surprised, honestly, if we saw 2.99 for a couple of reasons. One, it dang near broke the system. We have $11 trillion in mortgage debt across the country. On an average year, we turn $1-2 trillion.

We expect it to turn $5 trillion, almost half of the entire bucket of originations, this year alone, and I promise you it felt like everybody was trying to do it on the same day. It broke the system. In addition, we have the servicing, and I want to quickly touch on that. If I'm an originator and I am originating a loan and I'm thinking nothing about, and I want to originate as many loans as I can, you want to close as many homes as you can. That makes sense.

I'm over here and I'm originating loans and I don't think anything about it. Well, when that loan ... Let me actually back up. Before that loan closes, when that person goes under contract, I give them a rate and I lock in that rate, but that rate is locked in as a promise between me representing my company, Fairway Mortgage, and that buyer or refinanced borrower. I lock in that rate and say I locked in that rate of 2.99, because why not?

If I locked in that rate, I have to commit to 2.99 to that borrower. Now, in the meantime, the rates are moving every day, as you saw. The rates are moving at massive amounts, and so I need to protect as a company, Fairway Mortgage, and every mortgage company needs to protect against the risks if the rates go higher.

Well, when that loan gets sold, when that home finally closes and you get to the closing table and you guys are all excited because everybody just got paid and they just signed and they got keys, well, truth be told, that's when we had to figure out, "Well, I locked that guy in at 2.99, but now the market rate is 3.5, so as a lender, I have to buy that rate back down to the 2.99 that I promised the borrower," and we do that.

In turn, if rates go lower, to 2.5, that's not going to happen, but then you have an upside. The upside pays for the downside and the risk. In all of that, we have insurance and if we get outside the scope of what a company should theoretically be living in, as you know, insurance carriers will only wait so long and so they have this thing called margin calls, and if the rates move too quickly, they don't want to burden that risk anymore.

They require the lenders to pay the margin call for the risk that they're holding against those rates. Now, if I as a lender am planning on closing that loan, I'll get paid back some of that money, but not every loan will close. I could be writing a check as much as $20 million, $50 million, $80 million in a week's time for margin calls. It's going to strain those lenders who are not liquid, and that's a real thing.

Back to my history, then that loan closes and it goes to a servicer, and that servicer is responsible for it, they pay for the right to service that loan because they collect the interest every month. They have to pay the investor who's holding that note, so that servicer sells the hard paper, the note to an investor, and then they have to pay the property taxes, the homeowner's insurance, and the investor every month.

Here's where we go back to the forbearance because that servicer has to pay that investor and the property taxes and the insurance, regardless of whether or not they have any money coming in, but they had no money coming in. Well, servicers expect that to some degree, but these percentages are through the roof right now, which is why a lot of servicers were saying, "We can't buy any more loans, or we're not going to be able to fund these."

We've got a lot going on with the servicers right now. Now, luckily, Fannie Mae and Freddie Mac have a limit on that. They say, "Well, the servicer has to pay at least one payment to the investor if they don't receive a payment," and then you could start foreclosure proceedings, and the whole thing goes on.

Government loans didn't have a limit, so that servicer had to keep paying that investor for as long as that note was held because that participant or that buyer got a government loan and is in forbearance and is not making their payments anymore. That servicer is starting to seize up because they're still having to pay, but they don't have any money to pay because they don't have money coming in.

Therein lies the problem with the government loans and why people are starting to figure out "Can we continue to originate, because will anybody service them?" and you can't do all your loans with cash. We've resolved the fact that there are going to be some lenders that aren't going to be able to do the government loans. Having said that, there's a lot of money coming in from the federal government to protect these servicers. Now, all of those conversations started this week.

It also has to do with the fact that those loans were going to try to protect, so when you start seeing all of the lenders start to say, "Well, we're going to tighten the credit box, meaning we're going to increase the credit score, we're going to reduce the debt to income ratio," it's because they're trying to protect what they can sell.

Who's going to be the investor for my paper? Because interestingly enough, that 2.5% coupon that I'm watching, that mortgage-backed security might've started out as a 3.5 or a 4% mortgage interest rate that your buyer's closed on. Then they went to the servicer and the servicer took a little bit, and then it went to the aggregator and the aggregator took it a little bit, and then it went through the chain.

Now that that mortgage-backed security landed in an IRA or 401(k) at a 2.5% rate that you and I invest in, so we're paying for our own mortgages but after it has gone through the system. I hope that I shared a little bit about what's going on. I know we're going to have a ton of questions and I'm almost done. We have to remember that when this is all over, we are going to get to a place where life is going to return to normal.

If you think about it, you've been trapped in that home with your kids and your spouse, and all of a sudden you're going to want to go out to eat. Because you want to stop eating the home-cooked food and restaurants are going to get busy again, and the sons and daughters and siblings are going to want to go visit mom and travel, and airlines are going to get busy again. All those sports fans that have been eager for all those games are going to buy tickets to any games they can.

The music fans who have been diligently listening to music online, and I've seen some great concerts online, they're going to want to go see live events and the ticket sales are going to go up. Those athletes, like myself, that have been itching to go, well, then all of a sudden the gym memberships and all of those athletic fields are going to start going up again and, interestingly enough, my question is how sick of that house are they going to want to be and move?

Interesting, Home Depot and the maintenance services, those stocks are actually doing well right now. A few sales are up, people are ... They're stuck in their homes, they want to paint, they want to fix, but will they want to live there when it's over? I don't know, might be an opportunity, and certainly a reason I would want to stay in front of my database and communicate with them.

Here are three things that you can be doing right now because I told you I was going to leave you with some things that specifically you can do to continue to take advantage of the time that you have. Whatever pauses you have in your life right now, find new friends but keep the old. Ones like silver, ones like gold, that's the old saying from Peter's mom. My husband's mom chimes into my head all the time.

Stay top of mind. Keep relationships building. Get on the phone. Call people, check in on them. Be relevant. Call three old clients, call three current, call three new, just whatever you can do to continue conversations and see how they're doing and be a servant. Then, video techs, anything you can do where they can see their faces. Social media, we're doing a ton of live videos. Knowledge is power.

Commit yourself to pick up that book that you haven't read, reading two articles a day, getting yourself involved in what's happening so that you could start to see how this is unpacking and where can you go from here. Housing Wire is a great resource, NAR, CAR. I just saw something on NAR, they had a whole series of technologies and training that you could do, so that's a fantastic resource, and then walk the walk.

I was talking to somebody last night and they were like, "I was driving through and they were taking pictures and checking out a house and it was that eerie nobody's on the streets, people are all out on their porches looking at me, and it's like, 'Okay, did I just invade a space?'" It was so funny, I was dying laughing, but it's that. People are sitting on their porches, they're relating to one another, they're talking.

Granted, stay six feet away. Social distancing is a very real thing, but have that time and get friendly with your neighbors. This is the time to do that, and then if you guys need something to listen to, you need some educational materials, I started up a podcast about a week ago. There is already a ton of content in there, and you can load that up from your favorite podcast sources, whether that's Apple, it's already on Apple, it's on Blueberry, Tunein, and Google Podcasts, so check that out.

Nicole Rueth
The Rueth Team of Fairway Independent Mortgage Corporation
750 W Hampden Avenue, Suite 500
Englewood, CO 80110

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